Following a higher than projected credit expansion, particularly in the latter part of 2018, credit extended to the private sector by commercial banks contracted during the first four months of 2019.
The factors which contributed to this contraction are high market lending rates, sluggish growth in economic activity, subdued business confidence, as well as the settlement of arrears by the government on account of various projects which enabled repayments to the banking sector. Because of the slowdown in private sector credit, the year-on-year growth of broad money (M2b) also decelerated so far in 2019.
Meanwhile, the Monetary Board of the Central Bank of Sri Lanka decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 7.50% and 8.50% last week. This decision was taken through a careful analysis of current and expected developments in the domestic economy, the financial market as well as the global economy.
However, a lower growth than initially projected could be anticipated this year due to the Easter Sunday
day attacks although normalcy is gradually returning. This mainly affected confidence and sentiments of economic agents, particularly disrupting tourism and related activities.
The trade deficit narrowed with increased performance in export earnings, while import expenditure declined sharply during the first three months of this year mainly in response to the flexible exchange rate policy maintained by the Central Bank ahead of adopting the proposed flexible inflation targeting monetary policy framework.
The improvement in the trade deficit is likely to negate the adverse impact on the current account arising from the slowdown in services exports caused by the contraction in tourism recently.
Furthermore as measured on the year-on-year change in both Colombo Consumer Price Index (CCPI) and National Consumer Price Index (NCPI), some acceleration was noticed this year, thus the inflation is likely to remain in the desired 4-6% range in 2019 and beyond, supported by appropriate policy measures.
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